In a move that many have interpreted as being caused by uncertainty post-Brexit, Theresa May has pledged that an additional £2bn will be invested by the end of this Parliament into private sector Research and Development expenditure.

Official data shows that private sector research and development (R&D) spending rose 5% in 2015 to £20.9bn so the Government are obviously keen to back the right horse.

There are plenty of opportunities for SME’s and large companies alike to benefit from the R&D tax credit and the RDEC schemes, and many aren’t claiming what they’re entitled to.

R&D Tax Credits – what counts as R&D?

Accountants often use the acronym ‘AUOP’ to describe the conditions that need to be in place for a company to qualify for the R&D for the tax credits scheme.

‘A’ stands for ‘Advance’. Your project must create an advance in the overall field to qualify as R&D. It’s important to note that using existing technology for the first time in your sector will not qualify as ‘advancement’.

‘U’ stands for ‘Uncertainty’. There should be a level of uncertainty in your project to make it count as R&D. In short, this means that whatever you’re trying to develop should not be scientifically or technologically easy. In fact, the end goal of the project may be impossible.

‘O’ stands for ‘Overcome’. It’s imperative you’re able to explain how R&D helped your company overcome the uncertainty in your project. Showing that the R&D required testing, research and analysis can be expressed by a simple description of successes and failures you experienced during the project.

And finally, ‘P’ stands for ‘Professional’. Your advance should not be something that could easily have been worked out by a professional in your sector. You can prove the complexity of the R&D by getting the professionals working on your project to explain the uncertainties involved, as well as showing that other attempts to find a solution had failed.

R&D Tax Credits – Which parts of my project do not qualify?

Providing your project meets these criteria, the next step is to establish start and end dates.

Let’s take two construction companies used on the HMRC website as an example.

The first company specialised in constructing laboratories and designed a new type of building which allowed for individual units to be removed, contamination-free, before sliding external walls over the resulting cavity. Due to the technological uncertainties surrounding the mechanisms necessary to achieve this, the whole project qualified, as without R&D, finding a solution for the advancement could not have been made.

The second company used wood as part of a project, and found that although the wood traditionally had to be a certain age to meet the quality required, they could use younger and cheaper wood with the usage of a modified coating developed by the company itself. However, as this was only a very small part of the overall project, discussion with the site foremen informed the company directors that only the modification and development of the coating qualified for R&D relief.

Should your project qualify for the R&D tax credits scheme, the next step is to claim back what you’re entitled to claim on.

R&D Tax Credits – What costs can I claim for?

Your company can claim for a number of costs incurred during the R&D process. These include, as listed on the HMRC website,:

• Direct R&D staff costs (salaries, wages, class 1 NIC and pension fund contributions for staff directly and actively engaged in the R&D project)
• Externally provided R&D staff costs (staff costs paid to an external agency who provide staff directly and actively engaged in the R&D project)
• Subcontracted R&D costs (SME’s can claim for 65% of the payments made to unconnected parties, whereas RDEC expenditure subcontracted to other persons is generally unallowable unless it is directly undertaken by a charity, HE service, Scientific Research organisation or health service body)
• Consumable items (materials used directly in the R&D, including the proportion of water, fuel and power consumed in the R&D process)
• Software directly used in the R&D
• Clinical trial volunteers (costs incurred in the payment of those willing to partake in clinical trials for the furtherment of your R&D project)
• Contributions to independent research (applicable to large companies only when making contributions to a qualifying body such as a charity or health service body)
• Prototypes (not including prototypes developed with the intention of being sold, as this counts as production)
• Collaborative working costs (contracted collaboration with another company)

Though the list above is fairly exhaustive, there are costs which cannot be claimed back. They are as follows:

• The production and distribution of goods and services
• Capital expenditure under either of the R&D relief schemes
• The cost of land
• Payments towards use and creation of patents and trademarks, as these activities count as protection of a completed R&D project

R&D Tax Credits – So, is my company eligible?

If you’re the director of a small company or start-up your business will likely fall into the Small to Medium Enterprise (SME) category, meaning you should be able to claim back up to 33p for every pound spent on R&D.

Your company will qualify as an SME if you have:

• less than 500 staff
• a turnover of under €100m or a balance sheet total under €86m

The average claim made by SMEs in the UK is £61,514 (2015-16). This is not an insignificant sum of money so work with Burton Beavan to make sure you qualify and that you’re making the most of what is available to you to claim back on.

If you’re the director of a larger company, you’ll be using the RDEC scheme which offers slightly less relief but is focused on how bigger businesses conduct their R&D.

R&D Tax Credits – How does the scheme work?

For every £100,000 of qualifying expenditure, your company could reduce its Corporation Tax by an extra £130,000 on top of the £100,000 spent, thanks to R&D tax relief being set at up to 230% on allowable costs.

Here are three examples, one for a profit-making company…

…one for a loss-making firm carrying that loss forward or backward…

…and one for a company wanting to receive cash tax credit.

R&D Tax Credits – HMRC

Though there is no additional record keeping requirement specifically for the purposes of claiming R&D relief, it’s important to keep track of your project and provide a summary of the relevant information to HMRC once it’s completed.

Include a breakdown of the expenses that qualify for relief, as well as a focus on the ‘AUOP’ structure. These are the pivotal points which influence the eligibility of your claim. It’s best to keep your report concise and closely relevant.

R&D Tax Credits – When do I receive the money?

HMRC aims to deal with 95% of payable tax credit claims within 28 days of receiving them, but the date you receive the money depends on a few factors. If;

• Your business is currently making money: your overall corporation tax bill will be reduced. You’ll receive a repayment if you’ve already paid the tax

• You want to receive a cash payment because you made a loss in that financial year: the credit is paid directly into your business bank account within 4-6 weeks of HMRC receiving your CT600

• You want to carry a loss forward or backward: you will receive no payment; however, the loss will be reflected on future or revised CT600 submissions

R&D Tax Credits – We can help

HMRC scrutinises all R&D tax credit claims; from the expenditure made to the level of involvement a professional in your sector had in the project.

It’s important that every step in the process is followed. Burton Beavan is experienced in successfully claiming R&D tax credits for its customers. To enlist our help with your own R&D tax credit claim, call the team today on 01606 333900, or email us on hello@burtonbeavan.co.uk